Feds cuts interest rates for second time in seven weeks

(CBS News) — The Federal Reserve further cut interest rates Wednesday as it tries to extend the U.S. economic expansion in the face of President Donald Trump’s trade war with China and geopolitical risks such as the attacks on Saudi Arabia’s oil facilities.

The Fed trimmed rates modestly to a range between 1.75% and 2%. It was its second rate cut this year, after the central bank first cut rates July 30 for the first time in a decade.

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In announcing the cut, the Fed cited lower business investments and exports, as well as persistently low inflation that suggests more economic sluggishness than the central bank wants. Fed Chairman Jerome Powell also said Wednesday that the Fed could cut rates even further if the trade war were to escalate and drag down growth.

“If the economy does turn down, a sequence of rate cuts could be appropriate,” Powell told reporters Wednesday afternoon, while adding that the Fed’s rate-setting body doesn’t predict a downturn.

Mr. Trump, meanwhile, has kept up a stream of public attacks on the central bank’s policymaking. Shortly after the Fed’s announcement, the president tweeted, “Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”

He had recently called the central bank leadership team “boneheads.” Despite a still-solid job market and brisk spending by consumers, the president has insisted that the Fed slash its benchmark rate aggressively — even to below zero, as the European Central Bank has done — in part to weaken the U.S. dollar and make American exports more competitive.

How low the Fed’s rates will go remains an open question. Just seven of the 17 members on the Fed’s rate-setting body predicted an additional rate cut this year, according to economic projections released Wednesday.

Fed to answer questions

Powell is scheduled to hold a news conference at 2:30 p.m. Eastern time on Wednesday. He’s likely to be asked about the risks facing the economy, including the weekend attacks on Saudi oil production facilities, which sent oil prices surging and could raise inflation expectations.

The most serious threat to the expansion is widely seen as Mr. Trump’s trade war. The increased import taxes he has imposed on goods from China and Europe — and the counter-tariffs other nations have applied to U.S. exports — have hurt many American companies and paralyzed their plans for investment and expansion.

In recent days, the Trump administration and Beijing have acted to de-escalate tensions before a new round of trade talks planned for October in Washington, D.C. But most analysts foresee no significant agreement emerging this fall in the conflict, which is fundamentally over Beijing’s aggressive drive to supplant America’s technological dominance.

Overnight interest rates spike

Along with managing investor expectations, the Fed also this week has had to contend with an unusual spike in overnight funding rates that banks and corporations depend on for their daily cash needs.

On Monday and Tuesday nights, overnight borrowing costs, which usually stay close to the Fed’s benchmark rate, surged close to 10%. To calm markets, the Federal Reserve Bank of New York stepped in, infusing that corner of the market with more than $53 billion. The New York Fed bumped that figure up to $75 billion for Wednesday.

It was the first time such an action was taken since the 2008 financial crisis.

Economists believe this week’s logjam was caused by quarterly tax payments from corporations that need cash on hand to make those payments and rely on overnight lending markets for the funding.